Drax Group's (LSE:DRX) proposed acquisition of Bluefield Solar Income Fund Ltd (LSE:BSIF, FRA:5B3) looks increasingly attractive once investors look beyond the headline expansion into solar power, Jefferies suggested
Having had a few days to think more about Monday's £548 million deal, the broker said that the acquisition not only broadens Drax's renewable energy footprint but also improves the quality and visibility of its earnings.
The transaction should broaden Drax's earnings mix and increase the proportion of contracted and so "more visible" cash flows.
BSIF owns around 0.9 gigawatts of operating solar and wind assets, alongside battery storage projects and a development pipeline of more than 1GW.
Drax's is buying BSIF at a 9% discount to BSIF's March net asset value and on an EV/EBITDA multiple of 8.3 times.
Jefferies believes there is also scope for meaningful cost savings that could translate into roughly 8% upside to BSIF's £130 million EBITDA, before taking account of any revenue synergies.
This is because BSIF operates with a heavily outsourced structure, paying investment advisory, operational and administrative fees that the broker estimates total around £18 million annually. Drax could achieve around £10 million of annual cost synergies through lower maintenance costs, the elimination of advisory fees and reduced overheads.
Drax has highlighted potential revenue benefits, though the broker said these are "harder to assess and are not included in this analysis".
Perhaps the most compelling aspect of the deal is revenue visibility. Around 57% of BSIF's income comes from government-backed support mechanisms including Renewables Obligation Certificates, feed-in tariffs and contracts for difference.
Jefferies said there should be "good medium-term visibility" on these revenues, with much of the support expected to remain in place well into the next decade.
For investors, that could prove just as valuable as the renewable assets themselves.
As Drax seeks to reduce its exposure to volatile wholesale power prices, the acquisition offers a larger pool of contracted cash flows and a clearer earnings outlook, and Jefferies' conclusion is that the acquisition is "a positive for Drax".
